By Katrin Herrling and Jonathan Holman
The benefits of digital transformation are clear, but too many eight-figure investments fail to deliver on their promises of future ROI. Banking leaders rightly want to see value today and shouldn’t believe anyone who tells them that’s not possible. We have seen that successful disruptive digital propositions are typically delivered in three major phases, delivering value every step of the way.
For the Chief Executive Officer (CEO) or Chief Technical Officer (CTO) of a bank considering investment into a digital banking proposition, impatience is a virtue. From our work in the digital banking space, we have seen that transformation projects often become unstuck as huge investments today promise to deliver every imaginable benefit sometime in the future. Grand visions fail to live up to the benefits that the organisation wants to unlock.
Of course, it is easy to see why digital transformation often promises value in the future. Joining data together, building the data infrastructure and creating the insights from the data to deliver valuable solutions can be long-term projects. Especially if they get tied up in migration into cloud hosting, re-platforming, API-led service, or the building of data lakes.
But transformation must focus on delivering value fast – this can be done, and we have seen it done many times before. From this experience, we can distil a three-stage approach to delivering digital banking transformation that better serves the sector, with clear proof points showing the value of delivery that ensures investments drive tangible benefits.
Leaders should have the imagination, comprehension, bravery and focus to deliver all three phases of digitisation. It is easy to pursue the status quo, to stop at faster horses (as it improves the existing legacy IT and its issues), it is easy to not disrupt the current revenue streams or even incubate new ones. Kodak, after all, invented the digital camera but couldn’t let go of its film business, to the point it helped them to fail.
Stage One: Delivering Faster Horses
Digitisation in its first phase sounds the least ambitious — it is only focused on existing processes, channels and propositions, and simply digitises them. Although this phase doesn’t fundamentally change how the business operates, it allows the bank to do everything faster. It increases configurability, creates visibility of processing, increases controls, improves the customer experience (CX) and lays the foundation for every future stage.
This phase also involves the heaviest lifting. Digital transformation is not just about technology, it involves organisation-wide change, creating skillsets to be digitally focused, and installing the underlying platforms as the foundation. It therefore fails if people, culture and processes are not at the centre. The bank has to throw out old assumptions and re-learn how customers want to engage digitally with the bank, its propositions and staff.
The challenge tackled in this phase was summed up by Henry Ford: Customers were not able to ask for cars — the thing people did not know that they wanted or how it could improve things. Customers were simply asking for faster horses. The desire to own a car will only come when it’s demonstrated to people.
But just digitising existing products and propositions, giving customers faster horses, will miss how and when customers engage digitally — products and propositions have to evolve to be successful in a digital world where simplicity, low friction and instant gratification are expected.
Usually, this phase will coincide with the cultural mindset shift required to use an agile methodology. This is no mean feat and despite being something people say a lot, the realities of it are not fully understood and the perpetual project-like cycle for continuous improvement and deployment is not something budgets or leaders, often have the stomach for. “What do you mean ‘we’re never finished’?”
By successfully implementing digital processes, banks are able to deliver a greater level of certainty and service to more customers after having completed this phase; in conjunction with better, faster experiences for sales, onboarding, KYC, credit, fulfilment, legal and pricing.
Crucially, this will provide value at speed; tangible proof points that show that huge budgets are driving the benefits of transformation, ensuring the investment is directly connected to the benefits it is meant to unlock. For example, it might take a bank 10 minutes to onboard a customer digitally compared to two weeks manually.
However, the first phase will also enable the possibility of remote distribution and scale, alongside certainty of execution. This is what digitised channels and digitised products facilitate. The digital channel can be available 24/7 and the digital product never runs out of stock. Both can be consumed from anywhere in the world.
Data use, storage and processing cannot be ignored during this phase, they facilitate every part of the process and provide the critical foundations for phase two. Customer-facing and colleague-facing experiences have to be at the heart when redesigning experiences and bold decisions to eliminate manual processing and checks have to be made.
Stage Two: Intelligent Distribution
In the second phase, the bank can leverage newly digitised processes to unlock value. Digitisation allows banks to use data to enable not only automated decisions in response to a customer request but proactively engage with customers via consistent, data-led assessment and relevant support as the needs or circumstances of a customer change.
By using internal and external data as well as advanced analytics to unlock customer insights, banks can drive the personalisation of solutions and services, based on their needs. This is much like the algorithms that underpin social media which deliver personalised content tailored to the users’ search patterns, ensuring optimal distribution and user satisfaction.
In banking, we regard this phase as enabling ‘‘Intelligent Distribution’’. This is more transformative than the first phase, making processes more scalable and speeding up delivery. For example, banks can use previous data to pre-approve certain customers or merchants for certain services or can embed access to finance in accounting platforms or e-commerce platforms.
Banks that fail to develop intelligent distribution mechanisms are likely to miss out on commercial opportunities as customers increasingly expect that their needs are proactively served, making it convenient for them to consume services anywhere and at any time. By optimising service delivery, it can increase sales and derisk future product development by putting it in front of the people who need it automatically.
Banks may also find that this phase creates opportunities to develop and deliver non-banking value-add services to the customer. These could include Personal Finance Management (PFM) or Business Finance Management (BFM) solutions, accounting solutions, information and advice services, and optimisation of savings and investments, amongst many other options.
This phase optimises resources deployed across the bank and the return from investments in Business Development, Risk and Financial Crime. It makes it easier to prioritise sales activity and optimise interactions. Data can support the bank in offering the right product to the right customer, at the right price and right time. Digital processes help enable as many products as possible to be distributed to as many customers as possible.
There is immense value to unlock at this stage. However, products and services are essentially the same as before digitisation — it is only that their distribution is scalable and digital.
Stage Three: Dynamic Products – Achieving Customer Intimacy
The final phase of the transformation journey focuses on achieving the holy grail of customer intimacy. While at first, this involves understanding and better serving clients through personalised solutions, this phase should also anticipate customer needs — delivering solutions that dynamically adjust to the changing needs of the customer.
Having accumulated a repository of customer behaviour and other meta-data through digital transformation so far, banks can then couple this with Open Banking, Open Finance, accounting systems or payments platforms. At this stage, banks can begin to analyse customer circumstances in real-time and anticipate future events, even before the customer knows something might happen.
This deeper understanding of the client means decisions can now, not only be made at a certain point in time, on a one-time basis, using historic data (as with stages one and two) but rather, they can be made continuously. This unlocks the ability to deliver dynamic products that continuously iterate decisions and therefore continuously iterate the major product variables, such as price, security, limits, covenants, product optionality, and term.
These products can therefore consider any past or present information about customers, added to the bank’s models’ predictions about the future, to be adaptive and dynamic across a consumer’s or business’s life. For example, predicting cash flow problems for a scaling business and creating a solution, such as an evolving capital product that solves their problem before they have even spotted it. Alternatively, from a consumer banking perspective, this could be adaptive mortgages that flex over a person’s life as they earn more and have bigger housing needs.
It’s this level of customer intimacy that adds another layer of value beyond standard banking. These dynamic products will be much more like a service than a product. The idea of as-a-service models replacing products is now well established in many industries, as indeed it is with current accounts in banking.
In the future, banks may introduce subscription fees for differing tiers of these services, moving their revenue away from one-off product fees, or even from interest margins for the life of an overdraft, but instead to a recurring income paid-for-access to and delivery of a service, which is tailored to the customer.
About the Authors
Katrin Herrling co-founded Funding Xchange (FXE) in 2016, setting out to use access to new live data sources and advanced analytics to disrupt the inefficient SME funding space by creating the first UK platform for businesses to easily access bank and non-bank funding solutions in one place.
Jonathan Holman is a digital leader, technologist and banking enthusiast who is an expert in Open Banking / Open Finance and Digital Transformation. He is a founding Investor at Overlay payments and was formerly head of Digital at Santander in the UK. He is also a visiting scholar and author at London Institute of Banking & Finance and the Cambridge Centre for Alternative Finance.
